The Oil Story

Recently I ran across an interesting article on developments in the oil-producing world.  Provocatively headlined “The Collapse of the Old Oil Order,” it addresses the dissension within the Organization of Petroleum Exporting Countries (OPEC) and the economic forces that are affecting the price of oil and keeping it below $50 a barrel.

Much of the article addresses geopolitical forces — like Saudi Arabia’s very rocky relations with Iran and Russia, two other big petroleum producers, and changes within the Saudi regime itself to move the Kingdom’s economy away from near-total reliance on oil prices and its seemingly endless supply of crude — but the piece also gets into the basics of global supply and demand.  And those familiar elements from Economics 101 have changed in ways that the experts didn’t really predict, especially on the supply side.

With the discovery of massive supplies of shale oil and gas in the United States and the development of technology to extract it, for example, there’s lots of new supply in the marketplace, and no one is making the predictions that we’re going to run out of oil in the foreseeable future that we used to hear.  In addition, green initiatives and other forces have affected the demand for oil in developed countries, and the consumption of oil in developing countries hasn’t bridged the gap.  The result is an oversupply, with countries whose oil production costs are highest struggling to deal with the current economic reality.

Gas prices aren’t exactly cheap — in Columbus and nationally, they’ve actually increased recently — but they are far from their peak prices of $4.00 a gallon or more years ago.  And the days when mighty OPEC was unified and could singlehandedly send shock waves through the global economy seem to be behind us.  It’s a good example of how predicting the future based on the uninterrupted continuation of current trends can often be wrong.

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Richard’s First Trib Article

Here’s a nice Father’s Day present:  Richard’s first article in the Chicago Tribune has been published on-line.  It’s about rising gas prices in the Chicago area.

From the article, it sounds like Chicago gas prices are higher than they are here in the Columbus area.  And we’d better hope that Iraq doesn’t dissolve into chaos, because if it does we’re likely to see prices at the pump that are far higher than we’re seeing today — just in time for the “summer driving season.”

A House Divided On President Clinton’s Speech

The Webner House was a house divided last night after President Clinton’s speech to the Democratic National Convention.  It’s been a while since we’ve seen President Clinton giving a speech on the national stage, but he hasn’t changed much.  He still has that crinkly voice, the habit of starting every second sentence with “Now” or “Look” or “This is important,” and the finger-wagging and finger-pointing.  He still exudes a kind of roguish folksiness.

Kish thought President Clinton knocked it out of the park with his vigorous defense of President Obama’s performance and critique of the Republicans.  I thought the speech was too long and too unfocused, flitting from topic to topic on hummingbird’s wings without establishing any kind of theme, and not very convincing besides.

Consider President Clinton’s point on gas costs.  He said we should be grateful that the Obama Administration has issued regulations that will require cars to be twice as fuel-efficient in the future, saying that means we’ll be paying half as much for gas because we’ll be driving cars that need only half as much gas.  The problem with that argument is that the federal government has been issuing fuel-efficiency regulations for years, yet our costs increase because the rising price of gasoline outstrips any fuel-efficiency savings.  Is any American paying less for gas these days than they did, say, in 1994?  And, of course, President Clinton only focused on the cost of gas, and not the cost of the car.  How much will it cost to buy a car that meets the new standards? How many people will be able to afford them, and how many of the cars — like the Chevy Volt — will need to be sold with a government subsidy to even approach the range of affordability?

I also was struck by President Clinton’s point that the big difference between his tenure and now could be summarized in one word:  arithmetic.  He argued that Republican proposals don’t add up.  The use of “arithmetic” is interesting because a popular t-shirt in Republican circles these days is a play on the famous 2008 Obama “hope” poster; it features a silk screen of Paul Ryan with the word “Math.”  Republicans argue that it is President Obama’s budget proposals that violate basic principles of mathematics and are based on phony “savings” and overly optimistic assumptions about economic growth.  Is President Obama well-suited to attack Republican arithmetic when he has presided over a series of years that have produced trillion-dollar deficits, and his own budgets forecast enormous deficits for the foreseeable future?

Finally, President Clinton argued that no President, including Clinton himself, could have fixed the problems President Obama inherited in only four years.  The fundamental premise in that argument, of course, is that President Obama hasn’t repaired the damage in four years.  Even if you accept that conditions when President Obama took office were historically unprecedented, the problem is that President Obama, Vice President Biden, and other members of the Administration confidently predicted that the problems would be fixed and that the economy would be roaring ahead at this point.  Obviously, that hasn’t happened.  Some Americans may pause to wonder why we should reelect someone who hasn’t delivered on his assurances and now is saying that the job was tougher than he led us to believe.

Gas, Alas!

If you haven’t been to the filling station lately, I’ve got some bad news for you:  gas prices are spiking, again.

At our local Duke gas station, the price for a gallon of regular is creeping ever closer to the dreaded $4.00 mark.  And even if you go to Giant Eagle and get your advantage card discount, $60.00 fill-ups have become distressingly commonplace.

Increasing gas prices are a powerful downer, because there’s no realistic way to avoid them — unless, like the Bus-Riding Conservative, you live close to a bus line and are willing to conform your schedule to the timetable for the no. 4 bus, or the predictability of your work schedule allows you to car pool.  For most of us suburbanites, those aren’t realistic options.  Driving our car in to work and back every day is a necessary part of the daily routine, and the price of gas hits us directly in the pocketbook.  If, like me, you need to gas up about once a week, the difference between $2.50 a gallon gas and $4.00 a gallon gas quickly becomes more than chump change.  Add to that the increases in prices of groceries and other commodities that are delivered by gas-guzzling trucks, and the impact becomes even worse.

As far as the politics go — and in a presidential election year, everything has to be viewed through a political lens, doesn’t it? — President Obama’s allies will argue that greedy, gouging oil companies are to blame, and Republicans will contend that if President Obama had allowed more aggressive oil exploration and domestic production, the increased supply would have materially lowered the price by now.  And those who live in large urban areas and don’t use cars, anyway, probably aren’t go to feel much of a pinch.

But those of us in the heartland, where many of the “battleground” states are found, are feeling the pain.  It’s aggravating to go to the pump, see those numbers whiz by in a blur, and realize another $60 has flown out of your wallet.  My guess is that angry, frustrated voters aren’t a good thing for the incumbent.

Time To Flog The Speculators

Gas prices are much too high for most Americans.  It costs upwards of $60 to fill your tank, and that hurts.  Obviously, it’s time to do something about it.

Today, President Obama lashed out at oil speculators.  He thinks they are manipulating the price of oil and reaping huge profits at the expense of American families.  He wants more money to police speculation, higher penalties when manipulation is detected, and requirements that speculators put up more money before engaging in a transaction.

The President’s comments show there is nothing new under the political sun.  Years ago, Senators from grain-growing states blamed “grain gamblers” at the Chicago Board of Trade for volatility in grain prices and enjoying excessive profits at the expense of farmers.  They depicted the traders as if they were the Whore of Babylon and called for increased regulation.  It’s easy, you see, to blame unnamed greed-addled speculators for market volatility that, at times, is produced as the law of supply and demand operates in capitalist markets.

Does President Obama really understand how markets work?  Does he know who participates in futures markets, and who might want to protect their businesses and livelihoods against potential price volatility in certain commodities?

The beauty of such markets is precisely that they give businesses a chance to hedge their bets.  Consider airlines.  The cost of fuel has a huge impact on their profits and losses.  They’d like prices to stay stable forever — but of course, that doesn’t happen.  So, they protect against higher fuel prices by buying future contracts that bet on higher prices in the future.  If the prices shoot up, and airlines have to pay a lot more to fly, the profits they collect on their futures contracts offset those costs.  If the prices stay at lower levels, their profits are reduced by their losses on futures contracts — but they’ve protected themselves against potentially catastrophic loss.  And remember: for every airline, or municipality, or package delivery service that wants to protect against higher prices, there must be a party willing to bet, instead, that prices will go down.  “Legitimate” traders can only trade if someone –one of those awful speculators — is on the other side of the transaction.

So, let’s not be too quick to blame speculation for prices that are the product of reduced supply and increased demand.  Futures markets play a vital role in our economy, and allow many businesses to obtain a kind of insurance against the risks of price volatility.  If they didn’t exist, we would need to invent them.

An Ohioan’s Thoughts On The Race Ahead

We’re now less than seven months away from the 2012 presidential election. What does the race look like, from the perspective of battleground Ohio?

I think the 2012 election will be much less emotion-charged than 2008 was.  In 2008 many hoped that Barack Obama would be a transformative figure whose election would finally slay the dragons of racism in America.   Many others were panicked by the financial abyss yawning open beneath our feet and were looking for the candidate they felt was best suited to deal with the crisis.

Barring unforeseen events, neither of those emotional themes will be at work in 2012.  President Obama still has many supporters, but I don’t know anyone who views him as a kind of magical arbiter capable of bringing people together through sheer force of oratory and personality.  His time in office has demonstrated, to all but the true believers, that the President is a politician who makes the same kinds of political calculations that other politicians do.  The hopes for a miraculous national reconciliation and a perfect leader that motivated many people in 2008 just don’t seem to exist now.

Nor does the terror that gripped some people in 2008.  Worries about a complete financial meltdown cut both ways in that election; some voted for Barack Obama because he seemed to deal with the crisis without drama, others voted for John McCain because he was more experienced.  Now, I think, people are not panicky, but rather are concerned and angry — concerned because, years later, the economy still stinks and jobs remain hard to come by, and angry because our political leaders don’t seem to be doing anything much about it.

What does this mean?  First, I think fewer people will be deeply involved in the election and a smaller percentage of people will vote.  No one will be arguing that the election offers a chance to vote for a perfect candidate.  Second, I think many people have already made up their minds, based purely on their assessment of President Obama’s performance.  They either think he has done a good job in avoiding another Great Depression despite the obstructionism of his opponents or believe he has spent recklessly and put the country on the path to financial ruin.  Even the most powerful political ads aren’t going to change their competing perceptions.

Third, I think many people are still reserving judgment and want to see how things play out.  They’ll be making two judgments in the coming months.  First, is Mitt Romney up to the job?  Can he handle the pressure and juggle the competing demands without meltdowns or gross missteps?  If Romney passes that test, then they’ll think about whether President Obama has done a good job.

Elections in which an incumbent is on the ballot are almost always referendums on the incumbent’s performance, and I think 2012 will be no different.  Stripped of illusion and romantic hopes, undecided voters will consider whether the economy is improving in ways that affect their lives.  Are family members and friends who have been out of work getting hired, or are other acquaintances getting laid off?  They’ll look at gas prices, and unemployment statistics, and the stock market, and I think those indicators will tell the tale.  If unemployment rates inch back up, and gas prices remain at or above $4 a gallon, President Obama will face a very tough road.

Sitting On A Gas Price Spike

Dear President Obama and Members of Congress,

Could you please talk to your chauffeurs about the price of gas?  I know that you probably don’t drive or gas up your own vehicles, but your handlers and advisers and staffers just might, and therefore might know what I’m talking about.

The price of gas is spiking.  Here in Ohio, the average price per gallon increased 20 cents last week, and the price continues to climb rapidly.  This week, on my drive to Cleveland, a three-quarter tank fill-up cost more than $60.  Just to make sure you understand, that is not a good thing.  $60 is a lot of money.  If you have a job that requires you to drive a lot, as many of us do, higher gas prices suck.  As you’re driving, watching the fuel gauge drift down, you feel like you’re sitting on that sharp gas price spike, if you catch my drift.

Please don’t tell us nothing can be done about it right now, because drilling for oil in America wouldn’t affect prices in the short term.  Incidentally, why does that rationale only get used to avoid developing our natural resources, and never when we are talking about things like building commuter rail lines that wouldn’t be ready for years?  In any case, no one expects you to snap your fingers and lower prices immediately.  We do know, however, that the law of supply and demand works, and if we collect the oil and gas within our borders it will result in lower prices than would otherwise exist.  We just want you to stop flapping your gums and get off your duffs and do something to avoid the likelihood that we’ll be dealing with $6.00 or $7.00 or $8.00 a gallon gas for the indefinite future.

Speaking of commuter rail, please don’t lecture us about public transportation.  Out here in the Midwest, we don’t have the luxury of subsidized Amtrak trains as a travel option, and most of us who need to drive can’t plan our business trips around bus schedules.  You need to accept and embrace the fact that ours is a country of car owners and drivers, and we need gas.  Welcome to reality!

So please, figure out how to get our oil and gas out of the ground and into our tanks, and to do so in a way that is environmentally sensitive.  If you can’t do that, we’ll find somebody who can.  If that happens, perhaps you can experience firsthand the joys of crushingly expensive gas as you are driving to your cushy lobbying job or your next lucrative speaking engagement.

Sincerely, the American Commuter